JGB futures plunge, bargain hunting helps trim losses

By Satomi Noguchi

TOKYO, May 14 (Reuters) - Japanese government bond futures plunged to a seven-month low on Wednesday, dragged down by losses in U.S. Treasuries, before recovering somewhat as investors went bargain hunting.

Earlier in the session investors dumped JGBs after Treasuries fell on solid retail sales data which suggested that U.S. economic weakness might be less pronounced than some had thought, and after Federal Reserve officials sounded reluctant to cut interest rates further. [US/]

Banks also rushed to sell the government paper to avoid further damage to their books in a near repeat of sell-offs late last month when futures posted their biggest one-day loss in five years.

But some institutional investors such as life insurers picked up long-term bonds in afternoon trade as benchmark 10-year yields hit a seven-month high and helped futures to trim sharp losses.

"Tuesday's strong U.S. retail sales and views that the Fed may be more inclined to raise rates to tame inflation risks ignited selling in JGBs," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.

June 10-year JGB futures fell as much as 1.83 points at one point to 134.28, their lowest since mid-October, before recovering a tad to end the day at 134.97 2JGBv1, down 1.14 points.

On April 25, June futures suffered a hefty loss of 1.49 point in the regular trading session, the biggest for the lead contract since July 2003 as expectations for a BOJ interest rate cut receded, with some investors shifting their sights to an eventual rate rise.

The interest rate derivatives market showed that some investors were mulling a bigger chance of a Bank of Japan interest rate rise this year as views grew that the Fed would take a pause from lowering rates.

Swap contracts on the overnight call rate show investors see a roughly 45 percent chance of the BOJ boosting rates by the end of the year JPONIBOJ=TRDT, up from about 35 percent earlier this week.

But many market participants remained doubtful of a near-term BOJ rate rise from the current 0.5 percent after the central bank dropped its bias towards raising rates last month.

Traders said JGB sell-offs this session were largely attributed to technical selling by banks and traders who sold the bonds to hedge against Thursday's five-year note auction.

Institutional investors meanwhile took the opportunity to buy bonds at lower prices, they said.

The benchmark 10-year yield jumped as high as 1.700 percent and reached a seven-month high before retreating to 1.670 percent JP10YTN=JBTC, up 9 basis points.

"JGB yields have risen to attractive levels," said a senior portfolio manager at a Japanese life insurance company. "The market is likely to bottom out sooner or later as investors will start buying. Nobody is expecting the benchmark yield to rise to 2 percent."

At the same time, few investors are in a hurry to pick up JGBs as domestic stocks have recovered in the past two months, and global inflation concerns persist, the portfolio manager said.

Government data showed on Wednesday that Japan's annual wholesale inflation in April rose 3.7 percent from a year earlier, a little more than expected and rekindling worries that higher oil and other raw material prices could take a toll on the country's economic growth. JPCGPY=ECI

AUCTION LOOMS

The Ministry of Finance's five-year debt sale on Thursday is seen as an important gauge of investor demand after sell-offs in the past two months.

Japanese banks, historically the main investors in the mid-term sector, have dumped five-year notes aggressively as they were badly burnt by the bond slump.

The five-year yield rose 10 basis points to 1.280 percent JP5YTN=JBTC, after climbing to a nine-month high of 1.310 percent.

The two-year yield was up 6 basis points at 0.815 percent JP2YTN=JBTC, while the 20-year yield climbed 4 basis points to 2.220 percent JP20YTN=JBTC. (Additional Reporting by Rika Otsuka, Hiroyasu Hoshi, Editing by Michael Watson)